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Answer :
Final answer:
Excess reserves are the actual reserves a bank holds minus the required reserves mandated by regulation, which is option 3 in the provided choices.
Explanation:
Excess reserves are the amount of reserves banks hold that exceed the legally mandated limit set by a country's central bank. Specifically, excess reserves are equal to the difference between a bank's actual reserves and the required reserves that they are mandated to hold.
The correct answer to the question is 3) actual reserves minus required reserves. This is because required reserves are the minimum amount of reserves a bank is required to hold by regulation, and any reserves held over this amount are considered excess reserves.
Banks generally aim to minimize these excess reserves, seeking to lend as much of their deposits as possible to earn interest, which contrasts with holding excess reserves where they earn relatively little interest.
After the financial crisis of 2007-2008, banks increased their excess reserves dramatically, reflecting a shift in their willingness to lend. These reserves are a key component in the central bank's regulation of the money supply through monetary policy tools.
In the context of expansionary monetary policy, increasing excess reserves can be a strategy to increase the money supply and the quantity of loans by encouraging banks to lend more.
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